NYT: States lift subprime lending protections

October 23, 2014

MADISON, Wis. (10/24/14)--An Oct. 22 article in The New York Times details how lawmakers in eight states have voted to increase the fees or the interest rates that lenders can charge on certain personal loans used for subprime borrowers.

The overhaul of the state lending laws, in part, is the result of lobbying efforts by the consumer loan industry—those who make unsecured cash loans to consumers, according to the Times. For example in North Carolina, the lenders and their lobbyists overcame fierce opposition from military commanders who wanted to stave off the increases to protect military servicemembers from potential abuses.

A bill that would have raised the state's interest rate structure in 2011 initially died in legislature, but dogged lobbying efforts by lenders steered eventual passage of the legislation.

Under the previous law in North Carolina, lenders could charge 30% interest on loans up to $1,000 and 18% on a remaining balance of $6,500. The new law allows for rates of up to 30% on the first $4,000 of a loan and 24% on the next $4,000.

Similarly in Missouri, lawmakers passed a law last year that doubled the allowable origination fees to 10% of the loan's outstanding balance, to a maximum of $75. Indiana and Arizona allowed lenders to extend larger loans at higher rates.

The lenders that lobbied lawmakers have benefited from the changes. OneMain, owned by Citigroup, saw its profit increaseby 31% in 2013 from 2012. Subprime lender Springleaf Financial has seen its shares increase 78% since it went public in October 2013.

Credit unions, including those serving members of the military, take a more relationship-based approach to unsecured lending. AllSouth FCU, Columbia, S.C., with $693 million in assets, offers a standard unsecured loan product that can either be closed-end 24-month loan or open-end line of credit with a minimum payment of $25 or 2% of the balance monthly. Loan amounts start as low as $300 and go up to a maximum $10,000. Interest rates range from 9.9% to 18%. Interest rates and approval depend on creditworthiness.

Miramar FCU, San Diego, with $174 million in assets, offers the Asset Recovery Kit (ARK), a low-cost alternative to predatory lending. ARK is an interest-free, short-term advance, through which borrowers pay only a $5 fee, no interest for immediate cash advances of up to $500 (or 80% of net pay), and payable in one to six months.

Tinker FCU, Oklahoma City, with $3.2 billion in assets, offers a personal access loan at a 12% annual percentage rate for military personnel. With a $500 maximum, the loan amount cannot exceed 25% of the borrower's monthly income after taxes. The borrower must have the ability to repay the loan in full within the 30-, 60- or 90-day term allotted.

Fort Sill (Okla.) FCU's payday loan alternative product permits members to borrow up to $1,000 at an annual percentage rate, to be paid back within six months. There is no credit check or debt ratio calculated on the alternative payday loans offered by the $256 million-asset credit union. When the loan is disbursed, one-half of the proceeds is deposited into the member's savings account. Funds are frozen until the loan is paid in full. Once the loan is paid in full, member has a savings account to keep them out of the payday lending line.

The Pennsylvania Credit Union Association's (PCUA) Better Choice Program offers a payday loan alternative that includes financial counseling and required saving with a lower-cost, short-term loan. More than 87,000 short-term loans have been issued in Pennsylvania through "Credit Union Better Choice" since the program was launched in 2006---saving borrowers more than $27 million over using a traditional payday lending product, PCUA reported.

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